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(Bloomberg) — Emerge Canada Inc., an investment firm known for selling Toronto-listed versions of Cathie Wood’s popular exchange-traded funds, has allegedly violated securities laws, according to Ontario’s securities regulator.

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The Ontario Securities Commission alleges Emerge “acted in its own interests by knowingly taking an estimated C$6 million of investor money in self-dealing loans over a period of nearly four years,” or $4.2 million, it said in a statement. Most of the diverted money was allegedly used to prop up Emerge’s own businesses that were in financial distress, the regulator said.

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Emerge was unable to file audited financial statements for 2022 after its auditor quit. That led the OSC to ban trading in all 11 of its funds — including six Ark Investment Management LLC-partnered funds that follow Wood’s investment strategies — in April 2023. 

A month later, the OSC found that Emerge had insufficient capital and banned it from operating as an investment fund manager, portfolio manager or exempt-market dealer. The regulator also ordered that Emerge be wound down.

Ontario, like other jurisdictions, has capital rules for investment managers to protect investors in case of insolvency. 

The wind-down took several months, and unitholders in those funds were trapped until the process was completed in December 2023. Emerge owed five of its Ark-partnered ETFs C$4.7 million as of Dec. 29, 2023, which it never repaid. The unitholders are now unsecured creditors of the funds and a class action effort to recover the money was abandoned in April 2024.

Emerge’s founder and chief executive officer, Lisa Langley, is also named in the OSC’s application for enforcement, as well as the fund manager’s chief financial officer.

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In a highly unusual move, the OSC is also taking action against the members of the independent committee that oversaw Emerge’s ETFs: Marie Rounding, Monique Hutchins and Bruce Friesen. The regulator alleges that committee “breached its duties to investors, caused the funds to enter into prohibited loans, failed to properly address the conflict of interest created by the receivable, and failed to maintain proper books and records, or an adequate system of controls and supervision to ensure compliance with securities legislation.”  

Jennie Baek of McMillan LLP, a lawyer for Rounding and Hutchins, called the OSC’s action “unprecedented.” “These women have impeccable records,” Baek said. “We believe the grounds that OSC enforcement is relying upon are tenuous.”

Friesen declined to comment. 

Representatives for Emerge Canada and Ark Investment Management did not immediately respond to requests for comment.

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